Summit County, Colorado

1031 Exchanges in Summit County: A Guide for Investors

Written by Tucker Zimmerman, Summit County Realtor with Slifer Smith & Frampton

If you own an investment or short-term-rental property in Summit County and you are thinking about selling, a 1031 exchange can let you roll the proceeds into another investment property and defer the tax you would otherwise owe on the gain. Used well, it is one of the most powerful tools an investor has. Used carelessly, it is easy to blow on a technicality. Here is how it actually works, and the details that matter most for mountain owners. I am a Realtor, not a CPA or an attorney, so treat this as background and run any real transaction through a qualified intermediary and your tax advisor.

What a 1031 exchange does

A Section 1031 like-kind exchange lets you postpone paying tax on the gain from selling business or investment real estate, as long as you reinvest the proceeds into similar property through a qualifying exchange. It defers the tax, including depreciation recapture, it does not erase it. The deferred gain carries into your new property's basis, and it becomes taxable later if you sell without doing another exchange. Plenty of investors keep exchanging and defer for a very long time.

What qualifies, and what does not

The property you sell and the property you buy both have to be held for investment or business use. A primary residence does not qualify, because it is personal-use property. Since the 2017 tax law, 1031 applies to real property only, so this is a real estate tool now, not one for equipment or other assets. The good news is that like-kind is broad for real estate: almost any US investment real estate is like-kind to other US investment real estate. You can exchange a condo for land, a rental house for a commercial building, or a single property for several. It just has to be property in the United States held for investment, not a personal home and not inventory you flip.

The two deadlines that trip people up

Both clocks start on the day you sell, so the 45 days run inside the 180 days, not on top of them. These deadlines are strict, and missing them generally ends the deferral. That is why the planning happens before you sell, not after.

How you identify replacement property

There are a few ways to identify within the 45 days. Most people use the three-property rule, identifying up to three possible replacements regardless of value. If you want to identify more, the 200 percent rule lets you name any number as long as their combined value does not exceed twice the value of what you sold. There is also a fallback if you go over that: your identification still holds if you actually acquire at least 95 percent of the total value you identified.

You cannot touch the money: the qualified intermediary

This is the rule that surprises first-time exchangers. You are not allowed to take receipt of the sale proceeds. A qualified intermediary has to hold the money between the sale and the purchase, and the exchange paperwork must be in place before your sale closes. If you take control of the cash, even briefly, you can disqualify the whole exchange and make the entire gain taxable right away. Your own agent, attorney, or accountant cannot serve as your intermediary either. I can connect you with a qualified intermediary I work with, and the key is to set it up early, not after you have already closed.

Thinking about exchanging a Summit County investment property? 303-907-9129  or  TZimmerman@SliferSummit.com

Boot, and how to defer the full amount

To defer all of the gain, the general principles are to reinvest all of your net proceeds, buy replacement property of equal or greater value, and replace the debt you paid off with new debt or additional cash. Anything you pull out in cash, or any drop in debt you do not make up, is called boot, and it is taxable. You can still do a partial exchange and defer part of the gain, you just pay tax on the boot. Your CPA and intermediary will run the actual numbers.

The same-taxpayer rule

Whoever sells has to be whoever buys. The same taxpayer or entity that sold the old property must take title to the new one. A couple who sells together buys together, and an LLC that sells buys again as that LLC. There are common exceptions for entities the IRS disregards, like a single-member LLC or a revocable living trust, which are generally treated as the same taxpayer as their owner, but confirm your vesting with your intermediary before you close.

The mountain wrinkle: is your property really an investment?

This is the part that matters most for Summit County owners. A 1031 only works on property held for investment, not for personal enjoyment. A ski condo you and the family use most of the season is personal-use property and does not qualify. A short-term rental you run as a business can qualify. The gray area is the vacation home you rent sometimes and use sometimes.

The IRS gives a safe harbor for exactly this situation. For a dwelling you rent out, it treats the property as held for investment if, in each of the two years before the exchange (and the two years after, for the replacement), you rent it at a fair rate for at least 14 days, and your own personal use stays under the greater of 14 days or 10 percent of the days it is actually rented. Miss the safe harbor and you are not automatically disqualified, but you lose the automatic protection, so if you use your place a lot yourself, treat personal-use days as the pivotal issue and keep good rental records before you assume an exchange will work.

Colorado specifics

Colorado starts its income tax from your federal taxable income, so a gain you defer federally under 1031 is deferred for Colorado too. There is one mechanic worth knowing if you are an out-of-state owner: Colorado withholds tax on real estate sold by nonresidents, generally the lesser of 2 percent of the sale price or your net proceeds. When you are doing a 1031 exchange with no reasonably estimated tax due, you can claim an exemption from that withholding by signing the state's affirmation at closing. Your title company and intermediary handle this, and it is worth confirming with them on your specific sale.

Two advanced options

If the property you want comes up before you have sold your current one, a reverse exchange lets an accommodator acquire and hold the new property first while you sell the old one, within the same kind of timeline. And if you want to build or improve the replacement property with exchange funds, an improvement or build-to-suit exchange can do that, as long as the work is completed and in place within the exchange window. Both are more complex and more expensive to set up, so they are worth it mainly on larger deals.

Frequently asked questions

Can I 1031 exchange my Summit County vacation home?

Only if it is held for investment rather than personal use. A place you mostly use yourself does not qualify. A short-term rental run as a business can, and the IRS safe harbor looks at how many days you rent it versus how many days you use it personally. Keep good records.

What are the 1031 deadlines?

From the day you sell, you have 45 days to identify replacement property in writing and 180 days to close on it. Both run from the sale date, so the 45 days are inside the 180, and both are strict.

Do I need a qualified intermediary?

Yes. You cannot take receipt of the sale proceeds; a qualified intermediary must hold them, and the arrangement has to be in place before your sale closes. Your own agent, attorney, or accountant cannot serve in that role.

Does Colorado tax a 1031 exchange?

Colorado follows the federal treatment, so a gain deferred federally is deferred for Colorado too. Nonresident sellers should know about the state's real estate withholding, from which a qualifying exchange can be exempt by affirmation at closing.

Can I exchange a condo for land, or one property for several?

Yes. Like-kind is broad for real estate. As long as both sides are US real property held for investment, the type can differ, and you can exchange into more than one property subject to the identification rules.

Can I use a 1031 to move from one short-term rental to another?

That is one of the most common uses here, as long as both the old and new properties are genuinely held as investments. It is a good way to reposition, for example from a building with tightening rental rules into one with more room, while deferring the tax.

This page is general information, not tax or legal advice. Tax rules change and every situation is different. Work with a qualified intermediary and your own CPA or tax attorney before starting an exchange.